Equity Market Hiccup… (again)
First it was the sub-prime mortgage, now its the US recession… when will it stop
There are a lot fundamentally strong stocks which have suffered. The recent drop caused by the mixture of US recession & subprime mortgage appears to have pillaged the equity market much more than the previous ’sub-prime’ crisis…
FYI, this has definitely affect the capital component of my portfolio… luckily the options premiums have double (eg, RIMM near the money option is yielding 8-9% returns for 30day! this is insane!) This will definitely help rebuild my capital back up to the original value, 8-9% (16-18% margined return pretty damn good!) will mean 2-3 months before my capital is restored back to the original state. Remember, the covered call (share renting) strategy I have implemented is ALL ABOUT the premium, and is not about the capital growth or loss… high volatility = free money for options writers!! aka share renters (share lords)
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Equity correction continues despite …
Further drop in key short-term US debt risk premium spreads, although …
Longer end of the curve a different matter altogether as …
10-year corporate bond spread over equivalent government bond yield
continues to surge
Oil price falls in response to growing pessimism about US economy and …
Prospect of higher OPEC production, and …
Takes gold price with it, after the yellow metal had surged above $900 for
a day or two
$A’s recent flirtation with 90 cents stopped dead in its tracks, even
though …
$US also under pressure, because …
Yen carry trade unwinding big time again as risk aversion takes hold
Equity markets are now in full-on correction mode as yet another big New
York bank (Citibank) announces yet another round of losses (on top of
earlier ones) on its sub-prime mortgage portfolio.
And as the foreign exchange market once again losses its appetite for high
yielding risk currencies - the aussie and kiwi chief among them - the most
recent flurries in both far flung dollars have melted in the summer heat as
the yen carry trade unwinds once again. What better time to update our now
familiar dedicated yen carry trade paper.
The accumulated fall in the All Ordinaries index since its 1 November 2007
historical high is now lapping at 13 per cent - nothing like October 1987,
when it fell by 25 per cent in a single day - but the peak now seems a
distant memory nevertheless.
The drop in equities is unfolding just as key short-term debt market
spreads in the US continue to retreat, although the bond spread is rising
rapidly. A couple of weeks ago we said that central banks would not be too
concerned about the bond spread, preferring to focus satisfaction at the
fall in spreads at the shorter end of the curve, which is the part of the
curve their coordinated intervention was, and still is, squarely aimed.
That assignment of priorities stands, but it is fair to say that the
continuing rise in the bond spread in the US bond market is now starting to
take on a life of its own.
The $US gold price breached $900 an ounce for a couple of days but as the
oil price has retreated (to ‘just’ $91.90 last night in New York), it has
tarnished gold’s shine a touch.
But the decline in the oil price is hardly going to push the local petrol
price down much just yet, so upside inflation risks that loom large over an
economy still growing strongly will share top billing on the agenda for the
RBA’s first Board meeting for the year in two weeks time. Why will it not
be the undisputed number one item? It still might be depending on what next
week’s December quarter CPI throws up, but the growing risk of sub-prime
contagion spreading well beyond the US housing market complicates (to put
it mildly) what would otherwise be a watertight case to raise the cash rate
to 7.0% pa next month.
The competing pull of upside inflation pressures in the face of sub-prime
contagion risk is reflected in the saw-tooth profile of implied yields on
90-day bank bill futures contracts, as one day’s strong economic data is
offset the next by the latest bout of sub-prime jitters. Today is a down
day because the outlook for the US economy was hardly enhanced by
Citibank’s latest woes or a soft reading on retail sales in the US in
December, while a soft reading on local consumer sentiment further
constrained implied yields’ upside.
It is fair to say that high petrol prices during the Christmas holiday
period aren’t helping to shore up consumer sentiment, which fell by 8 per
cent in January. Not only were consumers faced with sky-high prices at the
pump, but general pessimism about the outlook for the US and global
economies and variable housing loan interest rate rises in addition to the
those directly related to the November cash rate increase all no doubt
conspired to push sentiment back close to its long-term (since 1980)
average.
When the RBA Governor speaks in London on Friday night Australian time he
will probably couch his comments contingent on the CPI, but the topic:
Economic Prospects in 2008: An Antipodean View gives him plenty of scope to
outline his thoughts on the extent to which he thinks sub-prime contagion
might crimp Australia’s economic growth this year.
(See attached file: WEEKLYSNAPSHOT16JANUARY2008.pdf)
(See attached file: YENCARRYTRADEJANUARY2008.pdf)
Alan Langford
Chief Economist
HBOS Australia
Level 8
BankWest Tower
108 St. Georges Tce, Perth
Western Australia 6000
phone: +61 08 9449 6354
fax: +61 08 9449 6266
e-mail: alan.langford@hbosa.com.au
The information contained in this publication is of a general nature and is
not intended to be nor should it be considered as professional advice. You
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